Educational Articles

Bank of America Reaches Settlement With Fannie Mae

Theresa Brophy
| January 07, 2013

Bank of America (BAC - Free Bank of America Stock Report), one of the largest banks in the United States and a Dow-30 component, has announced plans to take a number of actions that will substantially reduce its mortgage repurchase obligations for loans sold directly to Fannie Mae from the start of 2000 to the end of 2008.

It announced agreements with Fannie Mae to resolve claims relating to the origination, sale, and delivery of residential mortgage loans with an outstanding balance of about $300 billion. It will make a cash payment of $3.6 billion to Fannie Mae and repurchase $6.75 billion of loans sold to that government sponsored mortgage enterprise. These items are expected to be covered by existing reserves and an additional $2.5 billion provision to be included in soon-to-be reported results for the final period of 2012.

BofA also will make a cash payment to Fannie Mae for fees arising from foreclosure delays that will be covered by existing reserves and an additional $260 million December-quarter provision. And it plans to sell mortgage servicing rights with an unpaid principal balance of $306 billion in stages during 2013, recording half of the resulting $650 million gain in the December period and the remainder as the servicing is transferred. December-quarter results will also include another $2.5 billion of mortgage costs as well as $1.3 billion of tax benefits.

After all of the above items, BofA expects to report only a modest profit for the final period of 2012. We have reduced our December-quarter and full-year 2012 share-net estimates from $0.18 and $0.40, respectively, to $0.03 and $0.25. These measures should substantially lower the company's mortgage servicing costs in 2013, however. We are maintaining our 2013 earnings call of $0.90 a share at present.

Although we applaud these measures, BofA's mortgage related obligations still exceed most banks', and the company faces a challenging operating climate in the year ahead. A full recovery will probably take a number of years. Even patient investors may want to defer commitments at this time.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.